Profit tax

This article is about taxation in Hong Kong. For corporate profit tax (general), see corporate tax.

Profits tax in Hong Kong is Direct tax and also classified into Income tax.

According to Cap 112 Hong Kong Ordinance - Inland Reveue Ordinance (in short, IRO) Section 14, unless otherwise provided, profits tax shall be charged at the standard rate on any person who carries on a trade, profession or business in Hong Kong and assessable profits arising in or derived from Hong Kong for a year of assessment.

Tax computation

The formula is:

HK profits tax payable = Net assessable profit × Profits tax standard rate

Net assessable profit = Assessable profit − Loss brought forward (if any) + Loss transferred from partnership (if any)

Assessable profit = Profit or (Loss) per financial account + (Disallowable expenses charged in account − Non-taxable income credited in account) − Depreciation allowances − Approved charitable donations

Approved charitable donations

The Approved charitable donations are limited to 10% of the amount after deducting of the Depreciation allowances, per IRO Section 16D. And after the amendment recently, it is changed to 25% of the amount after deduction of Depreciation allowances

Profit Taxpayer

The term person includes corporation, partnership, trustee and sole properiter and so on.

Year of Assessment

The period of assessment mostly is from 1 April to 31 March of the following year, but it is up to taxpayer's wish with reasonable excuse. The example is financial year of the business.

Section 14

• A person carries on a trade, a profession or a business in Hong Kong
• There are profits arising in or derived from (trade, profession, business). Profit is not from the sales of capital assets
• The profits must be arising in or derived from Hong Kong
  • Contract effected test
  • Operation test
  • Provision of credit test
  • Development test or registration test

Badges of Trade

Any trade may be subject to profit tax unless a reasonable man can provide evidence to proof that there is not any revenue profit. In Hong Kong, capital profit is not subject to tax.

In order to prove the nature of a trade, the badges of trade are to be considered:

1. the taxpayer's intention of profit (one acquisition of the commodity)
2. Subject Matter of the commodity disposal (If enjoyment can be assume on original acquisition, e.g. rental)
3. the length of ownership,
4. frequency of similar transactions,
5. reason for disposal,
6. supplementary work and so on.

See also

• Inland Revenue Department (Hong Kong)
• IRO Section 5 Property tax
• IRO Section 8 Salaries tax

Reference links

• Cap.112 of Hong Kong Ordinance, Inland Revenue Ordinance (in short, IRO) IRO Section 14
• HK Inland Revenue Department: Questions and Answers
• Different profit tax standard rates apply to corporation and unincorporated business